Defaulting On a Car Loan: Understanding The Consequences
Defaulting On a Car Loan: Understanding The Consequences
Posted on August 22, 2023
If you’re struggling to make auto loan payments, the key is to take action now and not when you have missed a payment. It’s a tough situation to be in but not terminal and there are plenty of ways to salvage the situation.
We asked our auto loans team to outline exactly what you need to do if you think you’re about to default on a car loan.
Default on a Car Loan
Defaulting on any payment is a big deal. Some creditors won’t class a missed payment as a default until you miss an entire billing period while others class any missed payment as a default.
The trick is to take action before you miss a payment to try to avoid the situation altogether.
There are three things you can do to avoid that.
Make Savings Elsewhere to Meet Payments
Do you use a household budget? We strongly recommend them. Having every single outgoing listed in black and white in front of you can help you understand exactly where your money is going.
You can then identify areas where you could cut back to save money and make ends meet.
We all have spending we don’t see or aren’t conscious of. Whether that’s a magazine subscription you no longer need, TV or cable subscriptions you don’t really use, a gym subscription you forgot all about, impulse purchases when you’re bored at work, or something else.
A household budget helps you identify those which should help you cut back and hopefully, help you make those payments.
Discuss the Situation With Your Lender
If you have already tried that or the situation is more serious, we suggest having a chat with your lender. They have tools at their disposal that can help but are more likely to offer that help if you approach them before missing a payment.
They can help you renegotiate the loan, offer a loan deferment or payment holiday or extend the loan term to lower monthly payments. There may be other things they can do to help too.
The key here is to talk to them before you miss the payment. Then you’re a concerned customer asking for help rather than a default account that needs following up.
You would be surprised at how differently some lenders approach those two situations!
Refinance the Auto Loan
Another option you have if you risk defaulting on the loan is to refinance. This also depends on you taking action before you miss a payment.
Do it before and your payment history and credit score will still be intact so you’ll find it easier to get a new loan.
Do it after and you’ll have a missed payment marker and a lower score, making it more difficult to get a new loan.
Refinancing only really works if you have equity in the car and can make significant savings. For example, if you have paid off half the amount, you can refinance for that half, making genuine savings in your monthly payment.
If it’s a new loan and you don’t have much equity, it might not work so well.
Whatever you do, do something. If you need help in any way with refinancing, contact our team.
When you’re ready for a car lease or loan, get in touch with the Hannon auto loan experts at Northway Ford for great deals on auto finance.